U.S. Suit Against S&P Tentatively Allowed to Proceed

By Jeannette Neumann

A U.S. district judge Monday said he would tentatively allow the Justice Department’s lawsuit against Standard & Poor’s Ratings Services to move forward, a boost to one of the U.S. government’s biggest financial-crisis-era cases.

U.S. District Judge David O. Carter for the Central District of California in Santa Ana said that he tentatively rejected S&P’s bid to dismiss outright the federal government’s lawsuit but cautioned that he would make a final ruling by July 15.

Representatives for S&P and the Justice Department declined to comment on the judge’s statements.

Judge Carter made the ruling after he heard several hours of arguments from lawyers on both sides of the $5 billion lawsuit.

A tentative ruling, like the one issued on Monday, is often an indication of how a judge is likely to rule eventually, lawyers say. The purpose of such a ruling is typically to narrow the focus of the plaintiffs’ and defendants’ arguments before a judge.

The Justice Department sued S&P for alleged fraud on Feb. 4, saying the world’s largest credit-rating firm intentionally misled investors who bought highly rated securities linked to mortgages about the risks of those deals.

The Justice Department says that S&P, a unit of McGraw Hill Financial Inc., misrepresented its process for rating mortgage-linked securities as independent and objective while issuing high ratings to please bankers and other clients who pay for those ratings. Lawyers for the Justice Department allege that federally insured banks and credit unions relied on S&P’s ratings to purchase securities and later lost at least $5 billion after the deals imploded.

S&P has maintained that the lawsuit is meritless.

Lawyers for the company have pointed to previous legal rulings that statements about the independence and objectivity of S&P’s ratings were “mere puffery” and weren’t meant to be taken at face value by investors. That means the statements can’t be the basis for a fraud lawsuit, S&P’s lawyers argued.

That legal argument has been criticized by Sen. Al Franken (D., Minn.) and others as undermining the value of the company’s letter-grade ratings.

“As of April, S&P’s legal argument, their legal argument, was that nobody could reasonably think that they had a reputation for producing independent and credible ratings,” Mr. Franken said at a roundtable held by the Securities and Exchange Commission in May to discuss potential regulatory changes to the credit-rating industry.

In a recent court filing by both parties on June 24, lawyers for S&P didn’t use the word puffery. In S&P’s April 22 request to dismiss the case, lawyers for the company used the word “puffery” three times in the 21-page filing.

Other companies have also used the “puffery” defense in cases filed since the financial crisis.

Goldman Sachs Group Inc. stockholders sued the company in 2010 for making alleged misstatements about its procedures for addressing conflicts of interest. Goldman argued the statements were puffery and not meant to be taken at face value by investors.

U.S. District Judge Paul A. Crotty for the Southern District of New York wrote in a June 2012 decision that “Goldman’s arguments in this respect are Orwellian.”

He continued: “Words such as ‘honesty,’ ‘integrity,’ and ‘fair dealing’ apparently do not mean what they say; they do not set standards; they are mere shibboleths. If Goldman’s claim of ‘honesty’ and ‘integrity’ are simply puffery, the world of finance may be in more trouble than we recognize.”

That case is ongoing. A Goldman spokesman declined to comment.

Robert Piliero, a securities lawyer based in New York, said that Judge Crotty’s comments about “puffery” don’t directly affect the S&P lawsuit in California, but they do express “a level of disdain for even making an argument like that.”

In their defense, S&P’s lawyers have highlighted a December 2012 U.S. Second Circuit Court of Appeals decision that found “statements concerning the ‘integrity and credibility and the objectivity of S&P’s credit ratings’ were exactly ‘the type of mere ‘puffery’ that we have previously held to be not actionable.”

In a joint filing on June 24, the Justice Department proposed a jury trial in February 2015. S&P said that date wasn’t “reasonable” until the Justice Department clearly defined what specific securities were at issue in the case.